Managing Finance and Budgets

1. Managing Finance and Budgets Lecture 10 Activities & Solutions

2. Activity One What are the advantages and disadvantages of zero-based budgeting? How might any disadvantages be overcome?

3. Advantages Little Wastage of Resources Strategic use of resources, enable plans to be fulfilled more easily Disadvantages Time Consuming Managers can often feel threatened by ZBB Activity One- Solution The disadvantages can be countered by using the approach selectively, for example on every third year, or on particular budgets which tend to require strategic input, e.g. training, advertising, research & development.

4. Activity Two A Sales Manager believes that she could reach her overall sales budget target by reducing prices and selling a higher volume of units. Why might it not be sensible for her to do so? What overall issues does this raise about budget monitoring and control?

5. Activity Two Solution 1 A Sales Manager reaches her overall sales budget target by reducing prices and selling a higher volume. This is not sensible because: • Production targets will have been set in the production budget; this will involve budgeting for raw materials and labour etc. Suddenly selling more will cause problems elsewhere; this will mean that higher stock levels will be required, and may cause problems with debtors. • Similarly, reducing prices will reduce profitability. This will have an effect on the company’s balance sheet, and may ultimately reduce dividends to shareholders.

6. Activity Two Solution 2 What overall issues does this raise about budget monitoring and control? • Budgets are interrelated, and targets are set to dovetail; individual managers need to know how their targets match with those of others. One way to do this is through a budgetary committee, and participation in the budgetary process. • Managers not only need targets, they need to know to what extent under ‘normal conditions’ those targets can be flexed, that is, by how much can we exceed or fall short without a new budget needing to be set?

7. Activity Three What particular problems might be caused in a hospital by the incorporation of non-financial targets such as “Average patient waiting time” in an A & E Department as part of their budgetary considerations?

8. Activity Three – Solution (1) The problems are exactly the same as those outlined for financial targets: • Rigidity – managers may feel straitjacketed by the targets and manage purely to meet rather than exceed them; this means that ‘natural grass-roots development’ tends to be stifled. (e.g. new types of procedure which might ultimately lead (in the long run) to improved patient care will not be implemented, as in the short run this might result in failure to meet targets.) • Fixation- There is a focus on the target at expense of other criteria.In the example given, it could lead to undifferentiated patient care (e.g. a patient with a cut finger becomes as important as road traffic accident victim)

9. Activity Three – Solution (2) • Manipulation: The department is reorganised in such a way as to present figures which meet the target, but do not necessarily result in improvements. (e.g. All patients are met at the door by a doctor, and then asked to wait – this technically reduces the waiting time to zero, but does not improve the service) • Exaggeration: Accounting procedures are put in place which locally redefine what the target means. (e.g. Average patient waiting time redefined as: the time before first treatment divided by the total number of separate visits by a doctor or nurse subsequently.)